Electrocomponents : Trading Update (TRANSCRIPT)

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Orient Capital: Electrocomponents Conference Call

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09/03/22

Electrocomponents Conference Call

Lindsley Ruth:

Good morning, everyone. This is Lindsley Ruth, Chief Executive Officer of Electrocomponents TLC, and I'm joined today by David Egan, our Chief Financial Officer. Welcome to our trading update, covering our performance of March the fourth of 2022. We've continued to outperform the market. Our momentum has built from the start of the year to deliver stronger performance over the last nine weeks than expected. This has been achieved despite the challenge in environment and toughening comps. I want to start by thanking our people in teams. Our people are our strongest and most powerful differentiator, and we never underestimate the value they bring to all of our stakeholders. Crucially, everyone has worked very hard -- even more so, given that the COVID Omicron variant has been more contagious than previous strains, and that's driven more temporary absences throughout the business. We are driving market share gains, as our product and service solutions continue to resonate with the market. We believe this is due to our ability to source product where others cannot, ensuring we have strong availability of our broad and deep product range, which is offset industry supply chain shortages, while our solutions led -- an omni-channel model delivers a differentiated service to our customers, and allows them to operate more efficiently.

We have seen, across the group, continued commitment to differentiate our customer journey, as we help design, build, maintain, and prove and protect their operations. We are focused on improving our customers' digital experience, ensuring availability of products, while being responsive to the needs of our suppliers and customers through uncertain times. Across the group, we are generating operating leverage, which is helping offset lightening costs. This is being driven by our purpose-driven culture. We're supporting our people in teams as they develop, grow, and deliver, and focusing our efforts on where we can drive more value on a worldwide basis. We are mindful of the increasing geo-political challenges, and the potential increase in trading volatility this could bring. We do not have direct operations in the Ukraine, nor do we have direct operations in Russia, but our thoughts and support are with everyone affected by these events. I'd like to hand you over to David, to talk you through the details of our trading. David.

David Egan:

Thanks, Lindsley, and good morning, everyone. Over the last nine weeks, our like-for-like revenue increased by 22 percent, including our industrial product range. Total group revenue grew 23 percent, with a 1 percent contribution from acquisitions, 2 percent from additional trading days, and foreign exchange being a 2 percent headwind. Our main own brand product range, Iris Pro, grew revenue by 14 percent, lower than the group rate due to significantly lower revenue participation of less than 1 percent within the faster growing Americas region. We continue to see significant opportunities to expand our product offer into other categories, and to drive new product development, especially within the Americas, going forward.

[unintelligible] revenue grew by 27 percent like-for-like, with total like-for-like digital share now at 64 percent of group revenue. We are seeing a reduction in one-timelow-value visitors, as we have shifted our marketing attention away from paid advertising, towards organic marketing. A more proactive digital strategy is focused on delivering a B-to-C experience to our B-to-B

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customers. Moving now to the regions, in [unintelligible] which is roughly 63 percent of group revenue, so like-for-like revenue grows 17 percent over the nine-week period. Throughout the region, we have seen a growth in the average order value. We are seeing a higher number of items in customer baskets, and increased order frequency, which, over a sustained period, suggests growth in share of wallet. With the ongoing supply issues in the market, our breadth and depth of product continues to give us an advantage, particularly with customers looking to consolidate their purchasing.

The U.K., which accounts for roughly 40 percent of the region's revenue, has delivered an improved performance during the period, reflecting -- we believe -- disruption from the Omicron variant reducing since the start of the calendar year. Our performance in Germany has been the strongest in the region, and this is being despite the minor teaming challenges within our extended distribution center at [unintelligible] illustrating, again, the hard work our teams are doing, for which we thank them sincerely. The German growth is being driven by our strong commitment to investing in the German market, as demonstrated by the investments in our distribution center, product range, and digital customer experience. A user is winning more new contracts, including a major global consumer brand, adding European locations for current clients, and broadening into less cyclical and softer industry verticals. We have also seen an improvement in trading of our existing clients in more traditional industries. The Americas are roughly 28 percent of group revenue and delivered 32 percent like-for-like growth over the nine- week period. We're delivering a good performance within the region, with momentum improving during the period from a slower start. Market growth has been broadly spread across all industry segments.

Our growth rate continues to be supported by the investments we've made in our digital proposition, product depth, greater customer understanding, and a more targeted sales and marketing focus. We've seen our digital participation increase, customer numbers grow, and a higher average order value. Synovos continues to win new contracts, and we are introducing some of the successful operational progresses we have at [unintelligible] to drive stronger disciplines and efficiencies. We now have one management team across Synovos and IESA, working on a number of global pitches. We are well positioned to become a leading global player in the integrated supply market. Asia-Pacific, which is circa nine percent of group revenue, grew by 24 percent like-for-like over the nine weeks. The market backdrop has been challenging, as the majority of Asia-Pacific has struggled with increased variability relating to the pandemic, and further regional lockdowns. We are taking share in the industrial product market, while electronic product growth has been a helpful tailwind, too. Our country leaders are focusing on driving the revenue growth more profitably. We are restructuring supply chains to help more inventory -- to hold more inventory locally, and utilizing more sustainable and efficient transport modes.

Moving on to gross margin and costs. Inflation remains a key feature across both products and costs. Price inflation is roughly five percent, year to date, and has been increasing throughout the year. We continue to improve our pricing and discount approach, tightening up our offer to reflect market conditions, whilst maintaining our competitive position. Cost inflation continues to put pressure on the business. Labor accounts for circa 50 percent of our operating cost space. We work hard to attract and retain top talent, through providing a purpose-led culture, industry-

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leading benefits, and a flexible working model. Supply constraints, which are driving freight inflation, have not eased, and now we see oil price pressured, too. However, we do not expect material additional costs. We continue to restructure our transportation network, to minimize freight miles. As we outlined in November, 2021, reducing scope one, two, and three transport emissions are a key action of our 2030 ESG action plan for a better world. We continue to invest in our operating model to ensure we are well-supported and able to take advantage of the future growth opportunities we see. This includes strengthening our expertise, technological capabilities, product and service capacity to improve our operating basics.

Looking at cash -- despite the ongoing investment into our inventory, we still generate strong cash. Our inventory investment has enabled us to maintain industry-leading availability. We expect to end the financial year with circa 100 million pounds, year on year increase in inventory, which includes the additional product within our North American and European distribution centers. We continue to work on inorganic opportunities, but will accelerate our growth strategy. Lindsley and I have met some very exciting companies, most of which are outside an active sales process, and are impressed with the strategic fit and quality of opportunities we see. Our corporate development team is very busy, but we are retaining and maintaining our cultural, strategic, and financial criteria. So, looking forward, trading was a little softer at the start of January, potentially reflecting a longer holiday period, and the Omicron variant. However, since then, trading has been stronger than expected, despite the tougher comparatives and external headwinds. We are actively monitoring the potential impact of increasing economic and geo-political uncertainties on our markets, which may increase trading volatility. However, given our progress, year-to-date, we expect our full year revenue and adjusted operating profit margin to be ahead of the top end of the current consensus range. And now, I'd like to hand you back to Lindsley to summarize.

Lindsley Ruth:

Thank you very much, David. Exciting times -- let me start by saying, in today's ever-changing, fast paced world, we must continue to have a long-term strategic view with the daily, relentless focus on execution, and as I have said many times before, a quarter is like a year in the old world. A month is like a quarter. A week is like a month. A day is like a week, and every day matters in this business. So, despite the evolving external challenges, we believe that our proposition is resonating with our customers. We remain confident in our own abilities to drive further market share gains, to continue to out-perform, to improve our operating efficiencies, to deliver ongoing adjusted operating profit margin growth, and generate long-term value creation for all of our stakeholders. We see many opportunities to move from being a good company to becoming great, and we are a good company, but we're not yet great. We continue to prioritize the initiatives which will widen our differential with our peers, and those -- in terms of competition, that have yet to come. Namely, to become more solutions-led and prove the user experience, the customer and supplier experience, and develop our product offer further.

And let me be clear. As I was preparing for this morning, yesterday, I was looking through our annual reports, back to when we went public in 1967. Our very first annual report shows the history we have of resiliency in this business, and that we've demonstrated throughout time. The three key points that I'll highlight right now, from 1968. This is September 23rd, 1968. Three points from J.H. Waring, who was our chairman at the time, who was a co-founder of the

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company. He says -- number one -- "The aims of your company remain unchanged, to give all customers a really first-class, reliable service, matched with the highest quality products." Nothing has changed, from 1968 to today, with our goal of becoming first choice for our customers. And that depends on our ability to offer reliable service with high-quality products and services, giving our customers the first-class experience.

Two -- this is quite interesting, back in 1968, to look forward 53 and a half years, and that's the notion of -- the fact that we want to continuously do better. We see ourselves as good, but not yet great. And J.H. says, at the time, again, September 23rd, 1968, "These days, when forecasts are rapidly becoming debased coin, it is not without some trepidation that I mention that, so far during the present year, we have not only achieved, but exceeded our own targets, with a single reservation against possible outside national or international interference, it should be my privilege to talk to you about greatly improved results in a year's time." So, despite the headwinds, for many decades within this company, we were able to grow ourselves and our profits rapidly, and improve our results year over year. We want to continuously do better today, and in the future.

And three -- there was always a great appreciation for our people, and the realization that our people make the difference. "A company's fortunes are closely connected with the staff," J.H. says, "It is my great pleasure to report to you that your company is very fortunate, indeed, to have a loyal and hardworking staff. I wish to express, also on your behalf, our sincere gratitude to all of them who have worked so hard to achieve the excellent results on which I have been able to report." So, for all of those people that are on this call, for all of our shareholders and investors worldwide, you should be proud to know that we have an incredibly dedicated staff that are working hard every day to drive greater value on behalf of all stakeholders within this company. So, to hear more about our past, our future, and our journey to greatness, I invite you to join us and many of our leaders and exciting talent from around the group to our investor event, which will be on March the 30th of this year. This will be held physically in London with the option of virtual attendance, too. We will highlight the transformation of our culture, explain our differentiated offer, which is driving our market share outperformance, and outline the growth opportunities we have. Details on how to join the event are on today's R and S statement. So, with that, Bailey [spelled phonetically], if we could please open it up to Q and A.

Male Speaker:

Thank you. If you would like to ask a question, please press star, followed by one on your telephone keypad. If, for any reason, you would like to remove that question, please press star, followed by two. For those who have joined us online, you can request to speak flag icon on your web browser. As a reminder, if you are using a speaker phone, please do remember to pick up your handset before asking your question. Okay, our first question today comes from Rory Mckenzie from UBS. Rory, please go ahead. Your line is now open.

Rory Mckenzie:

Good morning, everyone. Just a few questions firstly on the top-line acceleration, and then one longer-term one. So, first, can you give more details about the customer trends? Previously, you talked about your B-to-B customer numbers growing -- about an 8 percent [unintelligible] I think, so has that tipped up, or is this more about, you know, [unintelligible] certainly talk about

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AOV and ARS. And then, secondly, on product price inflation, which is really picking up -- the [unintelligible] are doing well of course, giving a gross margin, but cost-to-serve customers to do any down trading, or changing any other behaviors as they're seeing that, kind of, cost of products going up as we -- maybe those two first. Thank you.

Lindsley Ruth:

So, first of all, I think what we've been really focused on for the last year is the quality of the business that we're doing, and so, really getting into an understanding of customer lifetime values, looking at cost-to-serve customers, looking at where we're making money, where we're not making money -- so, even looking at the churn of customers, looking at how we can focus on delivering more profit from the customers that we see as loyal customers that have the highest profit profile, looking at how we can sell more to those customers that deem us to be first choice, if you will, so average order value has gone up. We'll get into those details, certainly, in May. But if you look at customer's numbers, average order value -- those are all important to look at, in terms of trends, but most important to us is looking at how we can get more from the existing customers that we would say -- or, those that we really want to focus on. So, with that, we've had, really, a deemphasis, somewhat, on B-to-C customers that tend to cost more, have lower average order values where we're paying freight in Europe and Asia, that aren't necessarily driving the return we want. And that's not to say we do not want B-to-C customers. We're just looking at the profit profile of our customer base and how we make more money overall at a customer level and, like, that is something you have to earn the right to do by providing outstanding service, and that's the goal that we have, to become first choice to our customers.

In terms of behaviors and trends, we're not seeing any significant changes, obviously, as customers are returning from the pandemic, there are larger teams of people that are coming in, so certainly there will be some increase line of products to restock stockrooms, but not in our world, because of the need to benefit from price. Because, to keep in mind, lots of the products might sit on the shelf for two years -- just in case, because they're there in an engineering storeroom to support a breakdown of a process or a product on a line, so to go take two percent and hold it for two years, economically, doesn't make a lot of sense. So, we're not seeing a lot of pull forward orders at this point. We are, certainly, seeing a return of staff -- more people coming in and that's going to increase volume over time, but nothing that would -- we would say is out of the norm of what we've seen historically, Rory.

Rory Mckenzie:

Thank you. My last question -- I've also been doing some reading of old annual reports, but clearly my records don't go as far back as yours. I have May of 1979. The good thing -- it's clear that through crisis, you know, customers, kind of, always moved to these, kind of, strong leading companies. Then, there may be a bit of a reversal, and may be a bit more of a fragmentation of the market in the periods after. Clearly, we're going from one project to the next at the moment, but in all that customer analytics you were talking about, are there any pockets or customers you've identified that maybe, you think, might not prove as sticky or that you're worried about, you know, over time, as we go through the next full cycle, say.

Lindlsey Ruth:

First of all, I would like to extend the invitation for you to come to my office. You can see the